Recently, the ECJ has found Germany in breach of its obligations under the Habitats Directive for authorising the operation of a coal-fired power plant near Hamburg, Germany without an appropriate environmental impact assessment. The case is the latest addition to a series of legal battles surrounding the environmental impact of the plant. On the one hand, the negative environmental impact, in particular for fish species in the Elbe river, has led to litigation opposing the authorisation of the plant, including these infringement proceedings before the ECJ. On the other, Swedish power company Vattenfall has opposed the environmental conditions attached to its water use permit before a national court and before an ISDS tribunal which in its view would make the project ‘uneconomical’. This post will discuss the general legal background of the case, the ECJ judgment, and comment on the wider implications of these legal battles for the relationship between investment law and EU law.

Factual Background

Vattenfall and the Hamburg government began the development of a large coal-fired power plant in 2004. From an environmental point of view, one of the issues associated with the plant was its negative impact on fish stocks migrating in the Elbe river to nearby Natura 2000 sites. The plant would use large quantities of water from the Elbe river for cooling purposes which would then be pumped back into the river, leading to the death of those fish species protected by the Habitats Directive.

Nonetheless, the Hamburg authorities authorised the construction of the Moorburg plant and issued a water use permit following an environmental impact assessment (the original water use permit of 2008). In particular, the water use permit would impose restrictions on the use and discharge of water and would be conditional upon the construction of a fish ladder upstream of the Elbe river in Geesthacht and would require monitoring in order to verify the effectiveness of this compensation measure. Following proceedings started by Vattenfall before a national court and an ISDS tribunal, the German authorities decided to revise the water use permit and make the environmental conditions more lenient (the revised water use permit of 2010, see below for a discussion of this permit).

Following two complaints concerning the impact assessment the Commission started infringement proceedings against Germany in relation to the original water use permit of 2008. The Commission alleged that the impact assessment had incompletely and incorrectly determined the effects of the Moorburg plant on the Nature 2000 areas situated upstream of the Geestacht weir.

Article 6 Habitats Directive

An environmental impact assessment study is a key aspect of the operation of article 6 of the Habitats Directive. The Article lays down how Member States are to manage, conserve, and protect Natura 2000 sites. Article 6(3) in particular requires Member States to only grant permits for projects after it has been ascertained that the project does not adversely affect the integrity of Natura 2000 sites through an environmental impact assessment. In other words, a permit can only be granted if it can be demonstrated that there is no adverse effect on the integrity of the site. By way of exception article 6(4) allows for the approval of a project in the case of adverse effects under strict circumstances, in particular the absence of alternatives to the project. One of the key distinctions between an authorisation based on article 6(3) and an authorisation based on 6(4) is that measures compensating for adverse effects (compensatory measures) can only be taken under 6(4) and therefore mitigating measures (measures aimed at preventing adverse effects, rather than compensating for them) are prioritised.

Judgment of the ECJ

The judgment of the ECJ centres around the question whether the German authorities had complied with articles 6(3) and (4) of the Directive. In essence, the ECJ agreed with the Commission that Germany had not complied with the Directive, but also offered a lenient (for authorities and businesses) interpretation of some aspects of the Directive.

The Court started its analysis by reciting previous case-law that the German authorities could not agree to the construction of the power-plant until they have ascertained that ‘there is no reasonable doubt from a scientific point of view as to the absence of […] adverse effects to the integrity of the site.’ (para. 33) In that context, following the precautionary principle, the Court reiterated that the authorities are required to take into account ‘protective measures forming part of that project aimed at avoiding or reducing any direct adverse effects on the site’. These measures – often referred to as ‘mitigating measures’ – can be contrasted with ‘compensating measures’, as the Court did in Briels(paras. 28-30 of that judgment).

However, in this case, the Court found that the measures in question (a trap and truck system and a fish ladder installed further upstream) were mitigating measures. According to the Court the fish ladder in particular was intended to increase fish stocks and was expected ‘to compensate for the fish deaths near the Moorburg plant so that the conservation objectives of the Natura 2000 areas upstream of the plan would not be significantly affected.’ (para. 36, italics added) The Court thus opted for a lenient and broad interpretation of the types of measures that authorities can undertake to avoid adverse effects to a Natura 2000 site, as it could have construed the types of measures allowed as only those measures that directly mitigate the adverse effect of the project, such as for instance, restrictions on the water usage and discharge of cooling water.

Nonetheless, the Court found that Germany was in breach of the Directive because the impact assessment did not contain definitive data regarding the effectiveness of use of the fish ladder. Germany had argued that data from the period 2011-2014 (several years after authorisation) could have been used in that respect. The Court found this to be in breach of the precautionary principle (paras. 38-43) The Court also found issue with the way the monitoring was carried out (paras. 43-45).

Second, the Court found that Germany had breached its obligations by failing to take into account the cumulative effects of the Moorburg plant together with those of the upstream 1958 Geestacht pumped-storage power plant. Germany should have assessed whether such cumulative effects would adversely affect the protected fish species (paras. 56-63). However, Germany was not required to assess cumulative effects of a future project which did not have a prospect of succeeding in obtaining the relevant permits as this did not constitute ‘another project’ under the Directive (paras. 63-67). In other words, the German authorities should have taken into account the cumulative effects of all existing projects, but not projects which were unlikely to materialise.

A future conflict with investment law looming?

The German authorities’ actions at issue in this case before the ECJ concern the issuing of a water use permit in 2008. Under Article 260 TFEU if the ECJ finds that a Member State has failed to fulfil an obligation under the Treaties, ‘the State shall be required to take the necessary measures to comply with the judgment of the Court.’ In essence, this would require the German authorities to ensure that the impact assessment is properly carried out. This in turn may result in a finding that the Moorburg power-plant project does have adverse effects on the integrity of the site in which case a permit would need to be revoked, unless the exceptional circumstances of article 6 (4) apply.

However, events post 2008 might have made things much more complicated for the German authorities. As the result of a settlement before a civil court and the ICSID tribunal (ICSID stands for International Centre for Settlement of Investment Disputes and is a branch of the World Bank) that seized under the Energy Charter Treaty, the German authorities in question had even further watered down the environmental restrictions imposed under the 2008 water use permit. The 2010 water use permit has considerably lowered the environmental standards. Among other things, the monitoring period for the fish ladder had been reduced to one year and overall lowered the fish monitoring standards.

If the ECJ ruling ultimately results in revisiting and tightening the environmental restrictions imposed on the 2010 water use permit, this may very well result in a re-opening of the proceedings before the ICSID tribunal. Such a renewed claim – the initial claim before the tribunal amounted to 1.4 billion euros – may act as a significant financial incentive not to comply with EU law or, alternatively, if Germany is faced with an award against it, may force the German authorities to pay a significant amount of compensation in order to comply with the EU environmental acquis.

In that sense, one of the issues such continuation of ISDS proceedings would face is that such a tribunal would neither be in the position to correctly assess EU environmental law due to its mandate to guarantee investor rights nor be under the supervision of the ECJ for questions of EU law, such as the relationship between the claim and the EU environmental acquis.

Wider tensions between ISDS and EU law

The situation in Moorburg is exemplary of wider tensions between investment law and EU law. In this case, an ICSID award or future renewed proceedings may result in a deterrent to comply with EU law, or even with a judgment of the ECJ. An ISDS award may also potentially result in imposing a financial penalty for complying with EU law. In other cases, awards rendered by investment tribunals may require Member State authorities to offset any financial penalties or paybacks required by EU law. This is for instance the case in the Micula award, where the EU law requirement to pay back unlawful state-aid resulted in an award against Romania. In yet other cases, investment tribunals have proceeded in interpreting EU law (see in particular para. 137) without the proper guidance of the ECJ. All of these problems are further inflamed because investment arbitration is explicitly designed as an alternative to domestic courts, operating entirely independently of those domestic courts. This means that guidance to and oversight of these tribunals is generally lacking or insufficient to guarantee properly the full effectiveness of EU law.

These conflicts certainly question whether this form of adjudication is compatible with the EU’s own legal order, a question the ECJ may have to answer in the near future. In Achmea the ECJ will already have to render a preliminary ruling on the compatibility of an intra-EU bilateral investment agreement with the Treaties. And, as I wrote earlier, the ECJ will be asked by Belgium to give an Opinion on the compatibility of the Investment Court System in CETA with the Treaties. Today, the Belgian federal government has in fact announced that it has submitted the Request for an Opinion.

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